TLDR : Ai do NOT use your custom ability item sets and it can be pain to give them their own item sets. But here is the easiest way to do it.

My favorite part of the game is getting ability items and customizing EVERY character to make them more accurate to their power level.

The issue I ran into was that even tho I customized my characters, I noticed the ai did NOT use the item sets I had placed for that character.
I found out that CPU have their own ability item page that you need to customize separately and that seemed like a HASSLE to redo everything I did on a whim so it matches my Player 1 item sets.

The solution, Click your character that already has his ability set made, click an ability slot (empty or filled), Click X for " custom item set" page, Hold X to "save current item set" , press B to go back twice, on the top right corner it will say " Player 1 " so press right bumper until it says " CPU1 " , click a ability slot like before, Click X, Hold A to " Use custom item sets which basically pastes the saved set onto other characters.
TADA , Your CPU 1 that you fight will use custom items.

The quirks.... Saved custom items sets are limited so I have to keep deleting the old one before editing a new character.
Also, if you want custom items for CPU VS CPU fights, you will need to do this ALL OVER AGAIN for CPU 2.
This is a huge inconvenience compared to BT3 since all players and CPU share the same item sets in BT3, but on the bright side Sparking 0 allows custom item sets for EVERY transformation unlike BT3 and it is perfect for me.